Canadian Natural Resources Ltd. intends to spend $400-million on expanding its Horizon oil sands project in 2014, saying construction costs in the industry are under control so now is the time to move.

The company previously earmarked, but did not commit, the cash for Horizon. Steve Laut, CNRL’s president, on Friday said the company would proceed because costs are favourable, but does not intend to direct more than the allotted $400-million toward the project this year.

Market View

CNRL was one of the companies burned by cost inflation in the last major round of oil sands construction. A number of companies such as Suncor Energy Inc. and Total SA intend to launch major projects in the coming years, meaning they are jockeying for construction contracts and materials, and could ignite inflation if too many producers push ahead with their projects at the same time.

“Right now the conditions look fairly good,” Mr. Laut said in an interview Friday after discussing the company’s first-quarter results. “If the market conditions turn against us on the construction side, we’ll start pulling back.”

CNRL put out a call for bids, and the quality of the contractors, as well as the price, increased the company’s confidence on spending the money, he said.

The company on Thursday added a fresh $425-million to its 2014 budget to cover the costs tied to its recent acquisitions and what it views as development opportunities. That brings its 2014 budget to between $11.7-billion and $12.13-billion in 2014, including money it has spent so far on acquisitions. The company’s most notable move this year was buying Devon Energy Corp.’s natural gas assets in Canada for $3.1-billion.

Mr. Laut also detailed the company’s new monitoring system for the Primrose oil sands development, designed to prevent leaks like the ongoing bitumen seepage there. Bitumen leaked to the surface, including into an unnamed lake, beginning in the second quarter of 2013. CNRL thinks bitumen softened through its steaming system, travelled up old vertical wells and escaped into rock layers through faulty spots in the casing or cement.

Mr. Laut on Friday again said the leaks are a “totally solvable” problem. He used these words in March, 2014, and November, 2013. The company, he said, will more closely monitor the layers of rocks.

“We do have a solution how to do this when we go forward steaming. And that solution will be able to prevent seepages or any probable cause of seepages,” he said.

The company will monitor the so-called Grand Rapids rock layer when it injects high-pressure steam below the earth’s surface. This sandstone layer contains water, and sits above the Clearwater bitumen reservoir.

“So we can, with monitoring, see essentially instantaneously, if we have a release of the Clearwater into the Grand Rapids. And when we see that release, what we can do is stop steaming, and mitigate the pressure, and we can actually turn those wells that we’re steaming on to production [rather than continue steaming], and take the flow path back to the Clearwater and stop it from entering the Grand Rapids. So we can do that very, very quickly.”

The system means “there’s no way you can get passed any failed well bore, which we will repair, or through any other pathway to the surface,” Mr. Laut said.

The mess caused from the original leaks has been cleaned up, but when it is warm enough for bitumen to flow again, Mr. Laut still expects one to two litres to reach the surface per day. This bitumen, he said, will be contained.

CNRL has identified 31 old wells that could cause similar problems, Mr. Laut said. It has investigated 16 of those, and found defects in two, he said. “That tells you, like, not all well bores are going to cause a problem,” he said. “But we’re going to check every one that is in the steam zone anyway.”

Management once again mused about selling or spinning off CNRL’s royalty stream assets. The company inherited a package of these assets when it bought Devon’s Canadian natural gas property, and previously held some of its own. Combined, the royalty assets generate about $140-million to $150-million in annual revenue. Royalty stream assets such as these are exempt from paying royalties to the government, making them attractive. Encana Corp., for example, is in the midst of spinning off 5.2 million acres of so-called fee simple land and could collect between $747.5-million and $861.3-million through the initial public offering, while retaining about 75 per cent of the new company. The new company is dubbed PrairieSky Royalty Ltd.

CNRL said it made $622-million or 57 cents a share in the quarter, up from $213-million or 19 cents in the same quarter in 2013. The jump is tied to stronger oil and natural gas prices, the company said when it released results Thursday.

Restrictions

All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. Thomson Reuters is not liable for any errors or delays in Thomson Reuters content, or for any actions taken in reliance on such content. ‘Thomson Reuters’ and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies.